Exit Planning team versus Exit Success Team(TM)

For a business owner, giving consideration to the largest financial transaction and one of the most significant personal decisions of his or her life – i.e. the exit from their business – owners need to surround themselves with people who provide insights and assistance. The advisory team is a critical part of an owner’s planning process as it is vital to seek the counsel of others for such an important transaction. That being said, it is equally important to bring in the right people at the right time and to understand that there is a difference between the people who serve on your exit planning team versus those who serve on your exit execution (might I say “success”) team.

The Stages of an Exit Plan and Transaction

When preparing for exiting the business, owners need to understand that, while they may have a stable and profitable business on a day-to-day basis, buyers will need back-up for more than revenue.  And even if an owner’s employees work well with the current owner, buyers will typically want to know that there are employees who also know how to operate the business rather than just follow the current owner’s directions.

The cliché is to have owners not just work in the business but also work on the business.  In a perfect world, that starts before the business opens.  The advice to entrepreneurs when starting their businesses is to start their exit plan when they start their business.

If the exit planning does not start with the business planning, the backup to that advice is to have the owner allow enough time to gather information, research the true historical status of the business, and improve their business and personal situation to generate enough profitability to achieve a solid value that will meet the exit goals. This is the most common occurrence  for the planning stage of the exit, An owner’s commencement of the planning towards the end of the business instead of from the beginning requires due diligence as if the owner were a buyer.  In addition the owner needs to conduct material analysis and execute on the strategies determined to make the business better for the future owner as well as preparing the owner’s own personal situation so that he or she is well-prepared for the changes that come with an exit.  Of no minor aspect of this planning is including the protection of exiting owner’s wealth.

Meticulous execution of the plan creates a business that is going to appear better and be better when subject to the actual due diligence of the buyer for the execution stage. The execution stage comes when the planning stage has been implemented, tweaked and has generated enough history to show the validity and effectiveness of the business plan.  Then the owner is ready and in position to move forward with the execution strategy that was chosen during the planning stage. This is the point when buyers and financing are sought, taxes are assessed, legal agreements are negotiated and executed, investment strategies are chosen, and ownership changes hands.

There are different skill sets and, therefore, different advisors that are required for each stage of the overall exit planning strategy.

Soft Skills versus Hard Skills

The world of professional advisors to business owners can be neatly divided into those who practice “soft” skills and those who practice “hard” skills.

“Soft” skills include human resources, team and culture building, leadership and management training, personality assessments, employee education, human capital assessments, as well as strategic and business planning. In short, the “soft” skills address the areas of a business that can be more intangible but still critical to the successful operation of the company and the comfort and serenity of the owner as the exit time grows closer.  The comfort of the owner can be critical to successfully moving forward and enjoying life post-closing.  This type of counseling can provide stability and less concern about the impact of the exit on employees and family.

“Hard” skills, on the other hand, are those that apply specific and direct solutions to existing situations. These include, law, accounting, tax, negotiations, estate planning, financial planning, budgeting, business and management reporting and various forms of technical expertise that are also critical to the running of the business.  If the exit planning started with the start of the business, the fulfillment of the hard skills occupies less time and distraction, gives the buyers a more positive view of the business and its value, and provides for the execution of the final stage of the exit plan.  If the exit planning was recognized as mandatory by the owner as retirement became more desired and the planning phase started well before the true desire to sell, it will still result in the foregoing benefits.  If little or no planning is conducted because an owner has not taken the soft skill advisors’ recommendations to heart, the exit will be a bumpy road and likely not as financially rewarding.

From a legal standpoint, the selling owner must understand that failure to plan and failure to execute the plan can result in significant losses post-closing and, worst case, possibly litigation due to inaccurate disclosures or failure to disclose.  While this may sometimes intentionally be done, often it is just the result of an owner failing to conduct his or her own due diligence of their own company and benefiting from the experience and advice of the exit planning team.

Each type of advisor is needed throughout the life-cycle of the business as well as during the stages of the exit. The key is knowing when and how to engage the services of each of these advisors for your specific needs.

A Guide to Which Advisors to Deploy and When

There is no boiler-plate system for employing these various types of advisors because different businesses, service, retail, manufacturing and construction for example, have different levels of priority for performance and compliance and, perhaps more significantly, all owners’ needs and all situations are unique.  Some general guidelines and examples can assist with whom to select and when.

No matter who is going to be the successor owner of the business, it is required that the business be prepared for this future owner. Good products or services, great people, solid management, good culture, strong communication policies and a general feeling of pride among the employees of the business are very helpful towards the likely success of the business under a new owner, which helps preserve the employees the owner has most likely developed close relationships with, especially if some of them are relatives!  Therefore, as a general rule, the “soft” skilled advisors to a business are more important after the establishment of the business but early on in the exit process when the company is being prepared for a future owner. This most often happens over a multi-year period, allowing time for important changes to staffing and culture. This is not a factor to be overlooked as it also most often results in greater comfort and profitability during the period of time for structuring the exit process.  That being said, making sure that the “hard” skills of having effective company structure, proper employment agreements and compensation, bonuses, and benefit plans are also an important compliment to the “soft” issues.

On the personal side of the planning equation, an owner needs to do quite a bit of goal setting and soul searching early on in the process both for the business and themselves – once again, this aspect requires “soft skilled” advisors. Detaching oneself from your privately-held business can be a significantly emotional process since so much of an owner’s identity is often wrapped up in his or her business. So, during the early stages of the planning, consulting with relationship-based financial planners, life and family legacy planners, and other types of “soft skill / planning” consultants is important since owners need to understand the importance of having a strong conviction in the decisions that they make for their business and their family.

Once the owner has prepared himself or herself and prepared their business for the exit, the planning phase will begin to shift into the execution phase. During the execution phase of the exit plan, the allocation of time and effort of ‘soft’ skills to ‘hard’ skilled advisors will switch.  At this point in time you need to employ the services of the transactional advisors, such as business transaction attorneys, business brokers, accountants and tax advisors.  This effectuates a clearer more accurate and efficient explanation of the business to the future owner with clarity of disclosure, as well as assisting in the actual transition of the business to the next owner.  This is an affirmative benefit to the owner’s advisors assisting in identifying the most compatible buyer.

These “hard skills” and acknowledgement of the importance of these aspects come more into focus because the owner is now ready for the transition and is more acceptable to the true need to execute on the skills of different advisors, resulting in the long term benefit to the owner and the next owner.  That is why the understanding and commitment to post-closing assistance can lead to a better transition and better likelihood of the exiting owner receiving the full purchase price over time.

What is so often left for chance is compliance with laws and regulations.  While the business runs on and there are no claims or revealed failures to adhere to the law or regulations, whether they be federal, state, county or municipal, owners honestly believe they are in compliance.  Unfortunately, as honest and as willing as an owner is to follow the law, they are ultimately not the judge of their proper adherence.  While they may feel, for example, that whether someone is an employee or an independent contractor, taxes still are paid, that is not the approach or analysis by government in accordance with the laws and regulations affecting that aspect.  Perhaps an even more challenging example is the requirements related to confirming legal residency and I-9 documentation for employees.  A good example is the Abercrombie & Fitch audit by the U.S. Immigration and Customs Enforcement’s Office of Homeland Security Investigations. The audit commenced in 2008 uncovered numerous technology-related deficiencies in the company’s electronic I-9 verification system. No instance of the knowing hire of an unauthorized alien was discovered.  This did not prevent or cause the avoidance of a settlement for the violations of the technical aspects of the I-9 requirements in the amount of $1.04 million.  Is this a criticism of the government?  No, it is an example of honest intent and belief in compliance, but the legal failure to do so.  As things move forward, and the baby boomers contribute to the increase in sale of businesses, these reviews and enforcement of the law will increase.  This is why the earlier professional advisors are consulted with – to lower the chance for buyers’ reasoning and arguments to pay less for the business.

The Vital Role of the Quarterback

Remember that there are some advisors in the marketplace who serve as the quarterback to exit planning as well as the exit transaction. These multi-skilled advisors are some of the best allies in drafting a plan for the exit from a business while also helping to recruit all of the necessary “soft” and “hard” skilled advisors who will be needed for this multiyear engagement.  With a quarterback, there is a team.  The team needs to be used in their respective areas of expertise and the team mates themselves have to be open with the others in areas of common expertise but where their respective professions have them do alternative or different analysis.  Likewise, as set out previously, there are times when the different team mates are busier than others.  But they are still a team and benefit the owner and themselves by sharing and being cooperative with the other players.  Whether you like football, baseball, basketball, hockey or any other team sport, the team concept should be easy to see.

Concluding Thoughts

 Just like with the growth of the business and the marshaling of resources to assist with advancing forward, the owner needs to evaluate the types of advisors that the business will need for the exit plan and when they will be needed. Further, it needs to be clear for the owner to know when and how to utilize the skills of the advisors for direct benefit and understand the difference between planning for the exit and executing the exit. Remember that the choosing of personal and business advisors is a significant decision because you are letting these people into your private world to assist with a critically important transaction. It is wise to give a good amount of thought as to who is needed and when they are needed in order to help effectuate the exit plan.  At B2B CFO^®, we assemble a Success Team™(1) of licensed professionals to carry out your exit plan.

(1) – Success Team™ registered trademark of B2B CFO^®